What determines a business' value?

Home

Members

Services

News & Info

Entertainment

Help

Content Starts Here

What determines a business' value?

Whether you're keen to sell your business or just want to get access to some additional funds for your business knowing what determines a business' value is important.

The recent about turn of Chancellor Alistair Darling regarding tax on business sales has focused the minds of business owners on maximising their return. Mr Darling initially announced his intention to increase tax on capital gains for business sales to 18% and axe taper relief with effect from April 2008. This prompted a rush of activity as owners and buyers arranged sales to beat the tax deadline only for Mr Darling to reverse his decision earlier in February.

Those wishing to stay put but considering a cash injection may also be interested to know just how their business is valued by the outside world. (Although a debt funder will always look at the value of physical assets only).

Some of the key factors are:

Intellectual property/unique selling proposition
Financial prospects
Market growth
Number of potential buyers
Financial track record
Quality and quantity of customer base
Strength of management
Asset base
The X factor

Intellectual Property (IP)/Unique Selling Proposition (USP)

This relates to whether or not you own any IP. If your business owns international patents on technology for example then this is going to favourably influence the value placed on your business.

The USP refers more to how your product or service is positioned in the market. If your business has a recognised way of differentiating itself from the competition then this is a valuable asset. Dominoes Pizza used their USP brilliantly to create a global business - pizza delivered within 30 minutes or it's free.

Financial prospects

Businesses that can generate ongoing recurring revenue or has contracts in place to guarantee future income are going to be viewed more highly than those that don't.

Looking at ways where you can add value and bring your customers into a program of regular automatic payments not only assists cash flow but adds to the financial value of the business.

Market growth

Is the market you operate in expanding or contracting? This is often relevant where traditional businesses are being rendered obsolete by advancing technologies.

Whilst the market doesn't need to be expanding to have any value it does at least need to be staying constant for you to derive any 'points' under market growth.

Number of potential buyers

The value of your business will be affected by the number of potential buyers you have or could have for your product or service. It's slightly different from market growth because sometimes there is no market and yet the number of potential buys can be huge.

Take the Sony Walkman for example the market of people who wanted music on the move wasn't even created when the Walkman appeared. But Sony believed there were a massive number of potential buyers who would love to be able to enjoy music on the move. They were right, made billions and went on to revolutionise how we listen to music.

Financial track record

How well have you done in the past will obviously play a part in determining the business value, with business values often calculated on a multiple of historic net profit.

Quality and quantity of customer base

This also refers to the breadth of your customer base. Do all your sales come from a particular niche group or is it relevant to a broader section of the population. Trying to be all things to all people is not a good marketing strategy but having appeal across a wide market base is considered valuable.

Strength of management

The experience and knowledge that your management team will also influence the value on the business. If an entrepreneur starts a business it's important that the business is then systemised and the management team is seen to function in tandem and independently from that figurehead. Otherwise the business can be seen as too dependent on that central character.

Asset base

Obviously the assets that a business owns in terms of equipment, property and machinery are also important in determining a total business value.

The X factor

Nothing to do with Simon Cowell this is that special something that certain businesses have. And it is this element that could account for a large part of the final valuation. Does your business have an X factor?

Other issues such as disputes and lawsuits will of course work against you but these are just some of the factors that would be considered by an outside party when trying to value your business.